Mark Dampier: Standard Life's matrix picks the winners

The Analyst
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I have often berated insurance companies and banks for the dismal performance of their unit trusts, but there are exceptions to the rule. Standard Life Investments is one, and its range of UK equity funds has been particularly impressive. I have covered the UK Equity Unconstrained fund before, but I feel an update is warranted.

The fund is run by Ed Legget who joined Standard Life Investments in 2002 after graduating from Cambridge. He became the fund manager of UK Equity High Alpha fund from 1 October 2006, proving his skills in that role. He then took over the UK Equity Unconstrained fund on 18 April 2008, enduring a difficult first year. However, the fund bounced back in 2009 and became one of the top UK funds.

Despite all the bad news on the economy, David Cumming, head of UK equities at Standard Life with responsibility for some £30bn, is bullish on the UK market, believing the FTSE 100 has every chance of reaching 6,000 this year from around 5,300 at the moment. Given his view, it is interesting that many people have written off the UK, with the popular area being emerging markets. I like emerging markets as a sector, but it has become rather fashionable of late and I find a contrarian view on the UK an interesting one.

It is important to note that Standard Life has a team-based approach. The start and end point for all its research is the "matrix system". This computer-based analysis produces a buy-list of ideas by sifting stocks for characteristics such as value and price momentum. The team also use their own sector research to choose their favourite ideas. This forms a "winners list" of 20 shares, all FTSE 350 companies outside the largest 20 stocks. According to Standard Life, the winners list has outperformed the market since 2000 by 12 per cent a year, excluding costs.

As you might imagine, the fund can invest anywhere in the UK stock market. In 2009 Mr Legget supported many of the rights issues made by companies seeking extra funds, which is not always a recipe for success. However, in 2009 many of these stocks appreciated 30 per cent or 40 per cent as investors recognised that they weren't going bust and were, in fact, cheaply priced. At present he is focusing the portfolio on higher-quality names, which he believes will perform well in a lower-growth environment and where their views differ from the consensus. This means the portfolio is more broadly positioned, but still poised to benefit from a global economic recovery.

One stock he holds is Northgate, the top van rental business in the UK and Spain with over 100,000 vehicles. A collapse in residual values in cars and vans led to a rescue fund-raising last year. Mr Leggett now expects significant improvement in earnings as well as a resumption of dividend payments.

Another example is DS Smith, an international paper company focused on corrugated packaging and office products. Whilst this doesn't seem very exciting, demand for these goods is recovering well after a sharp fall in profits in 2009 and the firm is a major beneficiary of the weak pound.

With its exposure to smaller and medium-sized companies the fund tends to be a fairly volatile. Given this strategy, and the present fund size of approximately £180m, I would not be surprised to see Standard Life limiting new investments at some stage.

I would therefore suggest investors look to buy the fund on any market dips, as Mr Legget feels there is still plenty of opportunity within the UK market. I would also remind investors not to equate the UK economy (which looks dreadful over the next few years) with the stock market. The two are different, and even though I anticipate a period of market uncertainty from the impending general election, the more people I see who write off the UK stock market the more bullish I become.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

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